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Segmented Income Statement
Knitline Inc. produces high-end sweaters and jackets in a single factory. The following information was provided for the coming year.
  A sales commission of 5% of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be $20,000 for the sweater line and $50,000 for the jacket line.
  Common fixed overhead for the factory was estimated to be $45,000. Common selling and administrative expense was estimated to be $15,000.
Required:
- 1. Prepare a segmented income statement for Knitline for the coming year, using variable costing.
- 2. CONCEPTUAL CONNECTION Suppose that next year, all revenues and costs are expected to remain the same except for direct fixed overhead expense, which will go up by $10,000 for one of the product lines due to costs related to new equipment. Does it matter which line (sweaters or jackets) requires the new equipment? Why?
1.
Make a segmented income statement using variable costing for the coming year.
Segmented Income Statement using Variable Costing:
Variable costing is used in the preparation of a segmented income statement. In this income statement, the variable expenses are recorded separately from the fixed expenses which are further divided into direct fixed expenses and common expenses.
The following table represents the segmented income statement of Company K:
| Company K | |||
| Segmented Income Statement | |||
| For the Coming Year | |||
| Â | Sweaters ($) | Jackets ($) | Total ($) |
| Sales | 210,000 | 450,000 | 660,000 |
| Less variable expenses: | Â | Â | Â |
| Variable cost of goods sold | 145,000 | 196,000 | 341,000 |
| Variable selling expense1 | 10,500 | 22,500 | 33,000 |
| Contribution margin | 54,500 | 231,500 | 286,000 |
| Less direct fixed expenses: | Â | Â | Â |
| Direct fixed overhead | 25,000 | 47,000 | 72,000 |
| Direct selling and administrative | 20,000 | 50,000 | 70,000 |
| Segment margin | 9,500 | 134,500 | 144,000 |
| Less common fixed expenses: | Â | Â | Â |
| Common fixed overhead | Â | Â | 45,000 |
| Common selling and administrative | Â | Â | 15,000 |
| Operating income | Â | Â | 84,000 |
Table (1)
Therefore, the amount of operating income is $84,000...
2.
Describe the impact of an increase in the direct fixed overhead expense on each production line that is sweater and jacket.
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